Weekly Closed-End Fund Roundup, February 14, 2020: Notes On BTZ, RQI And ASG
Summary
- 20 out of 23 CEF sectors positive on price and 15 out of 23 sectors positive on NAV this week.
- Real estate leads while emerging market income lags.
- Notes on BTZ, RQI and ASG.
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Author's note: This article was released to CEF/ETF Income Laboratory members on February 17th, 2020, and includes a rare reposting of the commentary that is normally exclusive to members only.
The Weekly Closed-End Fund Roundup will be put out at the start of each week to summarize recent price movements in closed-end fund (CEF) sectors in the last week, as well as to highlight recently concluded or upcoming corporate actions on CEFs, such as tender offers. Most of the information has been sourced from CEFInsight or the Closed-End Fund Center. I will also link to some articles from Seeking Alpha that I have found for useful reading over the past week. The searchable tag for this feature is "cildoc". Data is taken from the close of Friday, February 14th, 2020.
Weekly performance roundup
20 out of 31 sectors were positive on price (same last week) and the average price return was +0.42% (up from +1.28% last week). The leading gainers were Real Estate (+2.23%), Asia Equity (+1.17%) and Commodities (+1.09%) while Emerging Market Income (-1.05%) lagged.
(Source: Stanford Chemist, CEFConnect)
15 out of 31 sectors were positive on NAV (down from 18 last week), while the average NAV return was +0.47% (down from +0.84% last week). The top sectors by NAV were Real Estate (+3.02%), U.S. Equity (+1.17%) and Sector Equity (+1.05%). The lowest sectors by NAV were Taxable Munis (-0.34%) followed by Multisector Income (-0.16%).
(Source: Stanford Chemist, CEFConnect)
The top 3 sectors by premium were Multisector Income (+6.55%), Preferred (+4.34%) and Emerging Market Income (+4.20%), while the sector with the highest discount is Asia Equity (-11.90%). The average sector discount is -2.34% (up from -2.27% last week).
(Source: Stanford Chemist, CEFConnect)
The sector with the highest premium/discount increase was Asia Equity (+0.71%), and Emerging Market Income (-1.02%) showed the largest premium/discount decline. The average change in premium/discount was -0.06% (down from +0.43% last week).
(Source: Stanford Chemist, CEFConnect)
The sector with the highest average 1-year z-score is Limited Duration (+1.96) followed by Senior Loans (+1.72). There were no negative z-scores this week, the lowest was Asia Equity (+0.07), followed by Sector Equity (+0.47). The average z-score is +1.03 (up from +1.06 last week).
(Source: Stanford Chemist, CEFConnect)
The sectors with the highest yields are MLPs (12.55%), Emerging Market Income (9.19%), Global Allocation (9.10%), Limited Duration (8.38%) and Senior Loans (8.18%). Discounts and z-scores for the sectors are included for comparison. The average sector yield is +6.70% (down from +6.71% last week).
(Source: Stanford Chemist, CEFConnect)
Individual CEFs that have undergone a significant decrease in premium/discount value over the past week, coupled optionally with an increasing NAV trend, a negative z-score, and/or are trading at a discount, are potential buy candidates.
Fund | Ticker | P/D decrease | Yield | P/D | Z-Score | Price change | NAV change |
Oxford Lane Capital Corp | (OXLC) | -13.77% | 17.70% | 39.91% | 1.1 | -2.24% | 0.00% |
Gabelli Utility Trust | (GUT) | -7.81% | 7.73% | 49.52% | 0.5 | -4.79% | 0.19% |
Liberty All-Star Growth | (ASG) | -5.22% | 8.00% | -1.96% | -0.3 | -2.11% | 3.11% |
Barings Participation Invs | (MPV) | -4.47% | 6.43% | 21.74% | 0.6 | -3.56% | 0.00% |
Cohen & Steers Total Return | (RFI) | -3.87% | 6.23% | 2.85% | 0.2 | -0.66% | 3.10% |
Center Coast Brookfield MLP & NRG Inf Fd | (CEN) | -3.35% | 21.09% | 0.68% | -0.3 | -4.05% | -0.84% |
Vivaldi Opportunities Fund | (VAM) | -3.34% | 10.15% | -0.47% | 1.1 | -3.26% | 0.00% |
Royce Global ValueTrust Fund | (RGT) | -3.32% | 0.51% | -13.95% | 0.8 | -2.58% | 1.19% |
BlackRock Muniassets | (MUA) | -3.05% | 4.02% | 7.33% | 0.5 | -2.97% | -0.21% |
Tortoise Midstream Energy Fund | (NTG) | -2.85% | 16.87% | -7.65% | -1.6 | -3.00% | 0.00% |
(Source: Stanford Chemist, CEFConnect)
Conversely, individual CEFs that have undergone a significant increase in premium/discount value in the past week, coupled optionally with a decreasing NAV trend, a positive z-score, and/or are trading at a premium, are potential sell candidates.
Fund | Ticker | P/D increase | Yield | P/D | z-score | Price change | NAV change |
BlackRock Muniholdings II | (MUH) | 4.35% | 4.13% | 1.55% | 3.1 | 4.26% | -0.19% |
Flaherty & Crumrine Preferred Income | (PFD) | 3.88% | 5.26% | 13.60% | 2.1 | 4.07% | 0.53% |
Eagle Point Credit Company LLC | (ECC) | 3.21% | 15.98% | 58.94% | 1.8 | -0.07% | 0.00% |
MainStay MacKay DefinedTerm Muni Opp | (MMD) | 3.02% | 4.53% | 8.23% | 4.0 | 2.65% | -0.19% |
Delaware Investments Dividend & Income | (DDF) | 2.76% | 7.08% | 40.07% | 1.6 | 2.54% | 0.54% |
BlackRock Muniyield Inv Qty | (MFT) | 2.75% | 4.15% | -0.89% | 1.7 | 2.70% | -0.14% |
BlackRock Munienhanced | (MEN) | 2.57% | 3.91% | -3.85% | 3.5 | 2.57% | -0.16% |
Virtus Global Multi-Sector Income Fund | (VGI) | 2.55% | 10.90% | 3.28% | 3.7 | 2.29% | -0.22% |
Aberdeen Income Credit Strategies Fund | (ACP) | 2.21% | 11.82% | -2.40% | 2.8 | 2.96% | 0.65% |
Taiwan Fund | (TWN) | 2.14% | 3.16% | -13.38% | -0.2 | 2.77% | 0.25% |
(Source: Stanford Chemist, CEFConnect)
Commentary
(Note: This is a rare reposting of the commentary from the member site, which is normally redacted for public release)
BlackRock Credit Allocation Income Trust (BTZ) announced the results of its tender offer, with a pro-ration factor around 25%, meaning that a shareholder who tendered 100 shares would have 25 accepted by the fund at 98% of NAV. This was pleasing result because our base case was a proration factor of 20%. This means that more of our BTZ shares in the Tactical Income-100 portfolio were accepted than I had initially anticipated, giving us a +8.43% profit on those accepted shares for a holding period of only 39 days. Very nice!
Surprisingly, the post-tender drop in premium/discount valuation that we had expected did not occur; instead, the discount actually contracted after the tender offer had expired! This was unexpected because generally, we'd expect the fund to trade lower after the expiry date since buying at that point would no longer allow one to tender their shares at 98% of NAV (and a premium to the market price). Sometimes, the post-tender drop in share price cancels out the alpha gain from the tendered shares, but not so this time. Doubly nice!
Of course, for those that tendered 100% of their shares, there was a lock-up period where the shares were held by the broker and unable to be sold on the open market. A few members reported in the chat that their shares were released on Friday, February 7, allowing them to sell at the high point of the discount chart above (good job!). However, most members in the chat only had their shares released the following Monday, and rush to sell BTZ following its offer could account for why the discount then suddenly widened the next day.
As for our Tactical Income-100 portfolio, we are still holding onto BTZ. We are very pleased with how this tender offer went for us, and despite the sell-off over the past couple of days, the remaining ~75% of shares that we own are still a solid +6% (at the time of writing) thanks to both a contraction of discount since we purchased the fund as well as improvement of NAV. We may decide to rotate out of this fund if a suitable replacement is found, but we aren't in any hurry. Why? This fund is a mostly investment grade bond fund, which I believe makes a very nice counterpoint to the more volatile names in our Tactical Income-100 portfolio. Moreover, the valuation of a -5.34% discount combined with the 6.92% distribution yield is still attractive.
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Cohen & Steers Quality Income Realty Fund (RQI) announced the results of its transferable rights offering a few days ago. As members were discussing in the chat, the negative price action for RQI over the last two weeks appeared extreme even by typical rights offering standards. Therefore, we doubled down on RQI in both our Tactical Income-100 portfolio and Income Generator portfolio two days before the offering expired on February 13, 2020. The trade alert post linked above has more extended rationale for this move which I won't be reproducing here, but the basic thesis was that RQI's rights offering provided a solid opportunity to pick up a high-quality real estate CEF at a significant discount, despite the impending dilution from the offering. Moreover, we reasoned that because of the way that the subscription price formula for RQI's offering was structured, that a widening discount may reduce the attractiveness of subscribing, meaning less NAV dilution for the existing shares.
We were right in this prediction because the offering turned out to be only 68% subscribed, in contrast to some recent offerings that were oversubscribed. This is a good result for us because it means that the dilution from the newly offered shares will have less impact (since fewer new shares are being created at a -9.75% discount to NAV). At current numbers I estimate the NAV hit to be around ~2% per share. CEFConnect is showing a current discount of -9.15% for RQI, and even at the post-dilution effective discount of around -7.3%, is still an excellent entry point for those newer members wishing to follow the portfolios. We expect RQI's discount to contract in the weeks and months ahead, especially since its peers, RNP and RFI are trading at much significantly higher valuations. I would also point out that our two general rules for rights offerings: to sell the fund when the offering is announced, and (if holding through the offering) to sell rights earlier if one does not intend to subscribe, were both obeyed for RQI's offering. Hopefully our members benefited from our predictions one way or another.
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The Liberty All-Star® Growth Fund's (ASG) rights offering began on February 12, 2020, and is still ongoing, with an expiry date of March 13, 2020. This is a non-transferable, 1-for-5 offering with a subscription price of the lower of 95% of market price or 95% of NAV. This means that unlike RQI's offering, there is no floor on how low the subscription price can be (and hence, no limit to the extent of dilution). As expected, investors sold off ASG when the timing of the offering was announced, although most of the damage was actually done on the ex-rights date.
This is an exemplary case of inefficiency in the CEF marketplace because the fact that ASG would conduct a rights offering had been known for some time already. As we had wrote to our members in a Weekly Roundup from around a month ago:
...have investors forgotten that a rights offering for ASG is currently on file? When the timing of the offering is announced, I expect the price to drop quite significantly (as discussed in a previous Weekly Roundup). One can always "hide out" in an ETF with similar exposure such as iShares S&P 500 Growth ETF (IVW) in the meantime, which as you can see has a very similar NAV profile to ASG.
It pays to be alert about your CEF holdings! In this case, investors left a significant amount of money on the table if they did not sell the fund at the moment that the offering was announced, as per our general practice. There's actually even a bit of deja vu as pretty much the exact same thing occurred for ASG's previous rights offering in 2018!
(Source: CEFConnect)
This tells me that for investors who like ASG, they should be alert when the fund enters into premium territory as management isn't shy about pulling the RO trigger to grow their AUM when that happens.
How about for the investor that is still holding onto ASG? As this is a non-transferable offering, there's no option to sell the rights to offset the effects of dilution. Hence, for those investors that have cash in hand, I would recommend subscribing for the maximum number of shares so that the rights do not expire worthless.
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